Texas wants to prove its startup worth but may lack the money

This post is excerpted from Crain's: Texas wants to prove its startup worth but may lack the money by Nicholas Sakelaris

Serial entrepreneur Sean Minter wants to break the stereotype that Texas startups can’t compete with Silicon Valley by selling his own company for $1 billion.

The founder and CEO of AmplifAI doesn’t just say that with his own riches in mind—he believes a high-profile exit could do wonders for the whole startup ecosystem in Texas. Whether it’s accurate or not, Minter said it seems even bad ideas get funded in Silicon Valley while great companies go unfunded in Texas because there’s a lack of venture capital to go around in the Lone Star state.

According to the 2017 PitchBook-NVCA Venture Monitor report, there were 27 active venture capital investors in Texas during the second quarter of the year. California was No. 1 with 371 active VC investors. 

“They don’t have the ability to reach the next stage because the support doesn’t exist here. We need a billion-dollar company that makes lots of people rich so they will reinvest here,” Minter said. “We’re going to do that. We’re in the right part of the market. We’ll amplify Dallas.”  

The idea of selling your company sounds like a dream come true for many entrepreneurs but there are obstacles, both real and perceived, in Texas. Whether it’s lack of funding, lack of talent or infrastructure. Experts are working to remove impediments and to keep the deal flow moving and the ecosystem growing. 

But, there still just isn't as much money to go around as there is in Silicon Valley. 

There were 58 deals in Texas during the second quarter of 2017, according to PwC and CB's Insights MoneyTree Report. Those deals made $803 million across Texas in comparison to the $9.2 million and 469 deals across California. 

The Kauffman Index ranks Texas as No. 2 in startup activity among the 25 larger states in the U.S. The index was updated in May 2017 and finds this number by measuring new venture creation in the area.

Where is the venture capital in Texas?

Matthew Barnes, a partner with Dallas Startups.com, said there are plenty of resources to help early stage companies but once they start generating revenue, that’s where things dry up.

Through Dallas Startups.com, Barnes partners with companies for two or three years. It’s part accelerator, part incubator and investor for 15 to 20 Dallas companies. They provide intellectual property lawyers, public relations, social media specialists and other assistance to early stage companies.

“We bring a company in and really take them all the way from their idea on a napkin, where most people start, and take them where they have full traction and are revenue generating,” Barnes said.

The big question is, where do companies go after that? Sure, billionaire names like Mark Cuban or Ross Perot Jr. are always in Texas but not everyone is ready to go that big.

The startup ecosystem in Texas has come leaps and bounds from four years ago, but it’s still young, Barnes said.

“Half the money here is invested in oil, gas and real estate,” Barnes said. “You bring them a technology play here and they don’t know what’s going on.”  

Dallas Entrepreneur Center co-founder Trey Bowles takes a different perspective, believing that much of the venture capital that goes into Texas startups goes unreported. He believes startups are having success in Texas but no one hears about it, especially nationally.

“We’ve got to get more ostentatious and gregarious about the wins that happen here. Not every company that sells tells a bunch of people," Bowles said. “What’s going to drive capital infusion is the fact that people see example after example of early stage tech companies starting, growing and exiting for good amounts of money.”   

Barnes said Austin is swinging for the fences, trying to get a homerun with the next Google and Dallas is getting its hits and will be satisfied with a 400 batting average.

“The next two to five years we’ll have so many success stories coming out of here that the money’s going to start gravitating here.”

Corporate vs Startup

While some might see Texas’ strong corporate culture as a reason that startups won’t thrive, Bowles said it’s a big differentiator for the region. Relocations from California, such as Toyota’s North American headquarters that just opened in Plano, aren’t a threat but a chance for startups to make a real difference. 

“I think in the future it looks like the real opportunity and value for startups in Dallas is connecting into the innovation pipeline of corporations that are here,” Bowles said. “Corporations cannot effectively innovate in all the areas that they need to and that’s why startups are so important. Startups can move quick, agile, mobile, they can get things done and solve problems. Corporations need that.”

Growing resources

The Dallas startup scene looked very different when Bowles co-founded the Dallas Entrepreneur Center in 2013. There were the Tech Wildcatters and Health Wildcatters and a co-working space called Co-Habitat, founded in 2008.

“My goal was to aggregate entrepreneurs together and properly equip and educate them on how to build companies, making them more effective,” Bowles said. “They were no longer siloed. A collaborative ecosystem is more productive.”

The result was transformative. The DEC (where this freelance writer rents space) created 1,000 jobs with an economic impact of $130 million from June 2013 through the end of 2014.

Since then, the DEC, a nonprofit, has added co-working locations in Addison and Denton with new offices opening this fall in underserved parts of south Dallas. They’ll be at Southwest Center Mall, the University of North Texas at Dallas and Paul Quinn College.

The DEC also has franchises in Fair Park in Dallas and San Antonio.A plethora of other co-working spaces have opened up since then including WeWork, which has three North Texas locations.

The Texas advantage

Chris Loughlin, CEO of Digital Pharmacist, said he’s lived in Silicon Valley and other places around the world but none can top the business climate and work ethic in Austin.

“Austin’s been a great place to launch the business,” said Loughlin, who just closed a $6.5 million Series B funding last month. “We have a very good connection with the University of Texas and we’re able to source talent from the university relatively easily.”

As the name suggests, the startup helps pharmacies go digital. The company boasts more than 6,000 pharmacies, wholesalers and hospital systems.The company’s recent funding success highlights the potential in the Texas capitol to raise capital, he said.